The Foreign Person Gift Reporting Rules on Form 3520 Explained

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Gift from Foreign Person & Form 3520 Reporting

Gift from Foreign Person & Form 3520 Reporting

Reporting a Gift from Foreign Person & Form 3520

Internal Revenue Code Section 6039F requires certain US Persons to report large gifts, inheritances, and foreign trust distributions from foreign individuals and entities. In order to facilitate compliance, the US developed Form 3520. The form is required, even if the US Person is not required to file a tax return — and penalties can issue even when there is no unreported income. Not all gifts from foreign persons have to be reported. Rather, only gifts that meet the threshold requirement for reporting have to be disclosed on Form 3520. It is important to note that the threshold requirements will vary depending on whether it is a gift from a foreign individual or a gift from a foreign entity — all foreign trust distributions, no matter how small, are reported on Form 3520.  The IRS has significantly increased penalty enforcement, and many people are getting hit with an automatic penalty assessment for untimely Form 3520 (absent showing reasonable cause). We will summarize the basics of foreign gift reporting rules —

When to Report a Gift from a Foreign Person

Form 3520 is filed at the same time a person’s tax returns are filed. If a person files for an extension for their US tax return, the Form 3520 filing goes on extension as well. If the taxpayer also has a form 3520-A filing requirement, the due date is different. In addition, if you need to apply for an extension, Form 3520-A requires the filer to submit a separate extension form (Form 7004). This is different than form 4868 which is the form used to extend the time to file a US tax return. Even if the filer does not have a tax return filing requirement (because possibly they are below the income levels for having to file a tax return) they still must file a form 3520 if they meet the threshold requirement for foreign gift reporting.

Gift from a Foreign Individual and Form 3520 Filing

When a U.S. person receives a gift from a foreign individual, the threshold requirement is generally “more than $100,000.” In other words, if the US person receives a gift or a series of gifts from the same foreign individual in the U.S. tax year diving annual aggregate total exceeds $100,000, and the gift is reported on form 3520. Unlike a gift from a foreign entity, the reporting requirements for reporting a gift from a foreign individual are relatively straightforward.

Aside from some additional background information about the filer, the person filing the form 3520 must identify:

      • The date or dates of the gift

      • The FMV value of the gift (in USD)

      • The type of gift.

Foreign Entity and Form 3520 Filing

When a person receives a gift from a foreign entity, the rules are different.  The threshold requirement for reporting is much lower, and in 2019 it was $16,388. Therefore, if a US person received a gift from a foreign entity that exceeds $$16,815, then form 3520 is required. The reporting requirements for receiving a gift from a foreign entity are more detailed and require the following information to be disclosed on form 3520:

      • Date of Gift

      • Name of Foreign Donor

      • Address of Foreign Donor

      • Identification Number

      • Corporation or Partnership

      • Description of Property

      • FMV (Fair Market Value of the Gift)

If you do not timely file form 3520 with the IRS you may be subject to fines and penalties, although these penalties may be avoided, reduced, or minimized.

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